Thursday, August 21, 2014

SCIOD 9: This Magazine of Untruth

"Political economy," observed Frederic Harrison in his 1872 review of Thomas Brassey's Work and Wages, "professes to be a science based on observation."

But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital. ... The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed....

The decade of the 1870s was an auspicious time for political economy. On the eve of the decade, John Stuart Mill recanted the orthodox dogma known as the wages-fund doctrine, which has a curious relationship to Say's Law. Dudley Dillard referred to Say's law of markets as "a corollary of the wages-fund doctrine in the context of the fourth proposition on capital." Mill's fourth proposition maintains that "demand for commodities is not demand for labour."

Perhaps Mill's dictum could be more clearly expressed as a positive, qualified statement rather than a negative proposition: it is the supply of capital (not the demand for commodities) that constitutes the demand for labor. Or, supply (of capital) creates its own demand (for labor). A cheap labor market is always full of employers. From this perspective there is no such thing as involuntary unemployment, only overpriced labor. That is what Harrison meant by "the bitter pedantry" that "usually assumes its facts, after it has rounded off dogmas to suit its clients ." British trade unionist George Howell wrote of the wages-fund doctrine in 1878:

Perhaps no single doctrine has been more persistently or mischievously urged by political economists against the claims of the working classes than the dogmatic assumption that there is a certain wage fund which constitutes a definite portion of the existing wealth of the country for the payment of wages, and that this amount will be wholly used for that purpose, and that not one penny more can be so used.

In Work and Wages, Thomas Brassey didn't reject the wages-fund doctrine. He did something far more lethal to the glib propaganda value of the dogma. He complicated it. Brassey was not a political economist. He was an industrialist, heir to an international railroad construction enterprise, started by his father, that was one of the largest employers in Britain at the time. He also inherited his father's vast accumulation of evidence on labor costs and their variation in response to different geographic, social, political and economic circumstances. From his analysis of this data, Brassey concluded that output per unit of wage cost was approximately equal, regardless of variations in the wage rate. Wages rates thus should be understood to incorporate differences in productivity of labor as well as fluctuations in supply and demand.

Conventional political economists were hardly unaware that there was a relationship between wages and the productivity of labor. It just wasn't central to their elaboration of the supposed wages-fund until Brassey's evidence proved too much to ignore. "With evidence like this before us," exclaimed Harrison in his review:

…we may well hesitate to accept the professorial dicta of so-called economists. They give us almost daily lectures based on the assumption that high wages inevitably imply dear goods and low profits…. And it is an axiom with some of these philosophers that every rise in wages is a fresh tax on British industry. Of course a rise in wages does not imply of necessity cheaper production; but it is, in a healthy state of trade, perfectly compatible with it. In point of fact economy in production has a progress far more steady, constant, and silent, than any advance in wages.

In his comprehensive critique of the wages-fund doctrine, American economist, General Francis Amasa Walker, cited the authoritative status of Brassey's evidence:

[B]y far the most important body of evidence on the varying efficiency of labor is contained in the treatise of Mr. Thomas Brassey, M.P., entitled Work and Wages, published in 1872. Mr. Brassey's father was perhaps the greatest "captain of industry" the world has ever seen… The chief value of Mr. Brassey, Jr.'s work is derived from his possession of the full and authentic labor-accounts of his father's transactions....

In turn, in what is "regarded to be the first modern economic textbook," Alfred Marshall credited Walker for "forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour…" Marshall judged that fact to be "more full of hope for the future of the human race than any other… [although it] will be found to exercise a very complicating influence on the theory of Distribution."

Under the weight of this complicating influence, the wages-fund doctrine retreated into the twilight of editorial boilerplate, old-school textbook orthodoxy and perpetual antiquarian controversy. Marginal utility theory stepped in -- gradually, very gradually -- to fill the void.

"In economics," Paul Samuelson once claimed, "it takes a theory to kill a theory; facts can only dent the theorist's hide." Perhaps. But perhaps the coup de grace can't be administered until the facts have given the old doctrine a thorough hiding.